WEDNESDAY, SEPTEMBER 26, 2012: Debt and Structural Adjustment
How did debt get accumulated? Post WWII, there was a lot of lending from
the IMF and the World Bank to support Keynesian model economics. A lot of
this lending was using to prop up dictators—corruption in how the loans were
distributed to different countries.
1970s: the era of surplus capital and loan pushing
there was an increase in loan pushing. The growth of the world
economy stopped (it was growing due to Japan and Europe recovering,
and this was completed). The developing world was growing slowly.
There was less demand for comedies being exported by the developing
world, and the US had racked up debt to support wars, projects during
the Cold War, etc.
There was an economic crisis at the end of the 1970s
The value of the dollar dropped (it was pinned to gold at that time—
the gold standard) due to this slowed growth. The US didn’t have
enough gold to back up the dollar and the gold standard was taken
away and the currencies were allowed to float again each other—
At the same time, OPEC increased the price of oil considerably.
Interest rates were low and there was a focus on loan pushing the
1970s to developing countries because banks wanted to loan. This
caused an increase in loans and an increase in debt. Low inflation+ low
interest rates—the countries were told they could pay back less than
they borrowed (a negative interest rate).
The US response to the crisis was to impose a neo-liberal model
(reduced role of state, smaller government, privatization, and reduced
regulation for trade, lower taxes, encouraging free movement of goods
and capitals across borders.).
In the early 1980s, interest rates increased (due to the economic crisis). It
was imposed by Reagan and intended to end inflation and cause a move of
money from the South to the North. It caused a shock in developing countries
that borrowed a low of money at low interest rates. They ended up taking
out loans to pay interest on the loans they had already taken, and ended up
with a huge racking up of debt.
1982: Debt crisis in South, Mexico, Brazil, Argentina, Poland, default on loan
payments with the IMF and the World Bank because the interest rates were
too high. People weren’t benefitting from the money from the loans.
Banks were afraid if they didn’t do anything, the international financial system
would meltdown. As a response there was a restructuring of debt re- payments (longer repayment time), borrowing/lending of more money to pay
debt interest. Within a decade, between 1980-1990
The IMF and World Bank took the lead role in managing the debt crisis but
focused on the northern interest. The defaulting issue was blamed on the
countries in debt, not the irresponsible loaners. They recognized the
increased interest rates were a problem and they realized the banks didn’t
allocate the loans well, but it was still blamed on developing countries.
The IMF and World Bank created SAPs to solve this issue:
Structural Adjustment Programs (SAPs):
Reversion to free market, reduction of the role of the state, and based on
neo-liberal ideas. They required state intervention to restructure the
economy. They were anti-statist (giving states less control). This was a
reversion to the Keynesian style development model (which wanted
a. Promotion of free trade and mobilization of domestic production for